Holding

The document issued by the bank is a contract of indemnity, not an unconditional bank guarantee, and must be construed solely on its express terms.

Summary

The cooperative society Mula Sahakari Sakhar Karkhana Ltd. entered into a turnkey contract for a paper plant with Pentagon Engineering, which required a 10% retention amount to be secured by a bank guarantee. State Bank of India issued a document on 4 September 1985 that purported to indemnify the society against losses arising from the supplier's liability, but the document lacked the typical language of an unconditional bank guarantee. After the contract was terminated, the society sought to enforce the document as a guarantee, while the bank contended it was merely an indemnity contract and thus not payable without proof of loss. The High Court erroneously treated the document as an unconditional guarantee, ignored the bar under Sections 91 and 92 of the Evidence Act, and awarded interest at 14% contrary to the trial court's order of 12%. The Supreme Court held that the document must be construed on its own terms, found no ambiguity, and concluded it was a contract of indemnity, not a guarantee, and that the High Court’s construction was a manifest error. Consequently, the Supreme Court set aside the High Court’s judgment, restored the trial court decree, and allowed the appeal with costs.

Issues considered

The nature of the document issued by State Bank of India: whether it constitutes a bank guarantee or a contract of indemnity.
Whether surrounding circumstances and extrinsic evidence can be used to interpret the document in the absence of ambiguity.
The applicability of Sections 91 and 92 of the Indian Evidence Act in admitting oral evidence to explain the document.
The appropriate rate of interest to be awarded on the amount retained by the bank.

Legislation cited

Subjects

bank guaranteecontract of indemnitydocument constructionIndian Evidence ActSections 91 and 92interest ratesuretyshipcommercial documents

Judgment

A STATE BANK OF INDIA AND ANR.
v.
MULA SAHAKARI SAKHAR KARKHANA LTD.

JULY 6, 2006

B [S.B. SINHA AND P.K. BALASUBRAMANYAN, JJ.]

Contract:

C Contract of indemnity and bank guarantee-Distinction between-
Contract for purchase of paper plant-At the instance of supplier, Appel/an/-
bank executed document in favour ofpurchaser by reason whereof it kept the
purchaser indemnified against all losses, claims, damages, actions and costs
which may be suffered by it-Document did not contain usual words found in
a bank guarantee such as .. unconditional" and "absolute "-Nature of the
D document-Held: Document constituted a contract of indemnity and not a
bank guarantee-Evidence Act, 1872-Sections 91 & 92.

Respondent entered unto a contract for purchase of paper plant. At
the instance of the supplier (Mis Pentagon), Appellant-bank executed a
E document in favour of Respondent undertaking to indemnify it against
all losses, claims, damages, actions and cost in respect of such sums which
the supplier shall become liable to pay in terms of the said contract.

Disputes and differenc:es arose between Respondent and the supplier,
on which Respondent terminated the contract and raised money claim
F against the supplier which however denied and disputed its liability.
Respondent construing the :said document as a Bank Guarantee sought to
invoke it but Appellant-bank resisted the same contending that the
document constituted a contract of indemnity and not a Bank Guarantee.

The question which arose for consideration in the present appeal is
G whether the document executed by Appellant-Bank in favour of the
Respondent was a contract of guarantee or a contract of indemnity.

Allowing the appeal, the Court
HELD: 1.1. A document must primarily be construed on the basis
H
320
STATE BANK OF INDIA v. MULA SAHAKARI SAKHAR KARKHANA LTD. 32 J

of the terms and conditions contained therein. While construing a A
document the Court shall not supply any words which the author thereof
did not use. Surrounding circumstances are relevant for construction of
a document only if any ambiguity exists therein and not otherwise.
1328-C, DI

1.2. The document in question is a commercial document. lt does not B
on its face contain any ambiguity. The said document constitutes a
document of indemnity and not a document of guarantee as is clear from
the fact that by reason thereof the Appellant was to indemnify the
cooperative society against all losses, claims, damages, actions and costs
which may be suffered by it. The document does not contain the usual C
words found in a bank guarantee furnished by a Bank as, for example,
"unequivocal condition", "the cooperative society would be entitled to
claim the damages without any delay or demur" or the- guarantee was
·"unconditional and absolute". 1328-D-Ff

1.3. The High Court erred in construing the document in question D
to be an unconditional and absolute bank guarantee. The approach of the
High Court on construction of the said document was patently wrong. It
committed a manifest error in terming the operative portion of the
document as a preamble. It had inserted terms and expressions which did
not find place in the document in question. The High Court furthermore
considered the oral evidence adduced by the parties despite the bar E
contained in Sections 91 and 92 of the Indian Evidence Act.
\327-D, E; 333-Hf

S. Chattanatha Karayalar v. The Central Bank of India and Ors., 11965]
3 SCR 318; P.L. Bapuswami v. N. Pattay Gounder, 11966( 2 SCR 918 and F
Daewoo Motors India Ltd. v. Union of India and Ors., 12003( 4 SCC 690,
distinguished.

Bishwanath Prasad Singh v. Rajendra Prasad and Anr., (2006) 2
SCALE 699, relied on.
G
New India Assurance Company Ltd. v. Kusumanchi Kameshwara Rao
and Anr., 11997( 9 SCC 179; Hindustan Construction Co. Ltd. v. State of Bihar
and Ors., (1999( 8 SCC 436; Federal Bank Ltd. v. VM. Jog Engineering Ltd.
and Ors., (2001 ( 1 SCC 663; Dwarikesh Sugar Industries Ltd. v. Prem Heavy
Engineering Works (P) ltd. and Anr., (1997( 6 SCC 450 and Mis. BSES Ltd.
(Now Reliance Energy Ltd.) v. Mis. Fenner India Ltd. & Anr., JT (2006) 2 H
322 SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A SC 192, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 280 I of2006.

from the Judgment and Order dated 2.8.2005 of the High Court of
Bombay in First Appeal No. 692/1989.
B
G.E. Vahanvati, SG, Tushad Cooper, Rajiv Nanda, Ramni Taneja, Balu
G., Swati Sinha and Jayame Singh for the Appellants.

Shekhar Naphade, Himanshu Gupta, Brij Kishore Sah and Shivaji for
the Respondent.
c The Judgment of the Court was delivered by

S.B. SINHA, J. (Arising out of SLP (C) No. 22576 of 2005)

Leave granted.

D BACKGROUND FACTS
The Resp?ndent is a 1:ooperative society. It has a sugar factory. It
entered into a contract for installation of a paper plant at village Sonai on
turnkey basis so as to enable it to utilize the left over material called "bagasse"
E of the sugarcane with M/s. Pentagon Engineering Pvt. Ltd. (for short
"Pentagaon"). The total value of the contract was Rs. 3,40,00,000/-. Pentagon
furnished a performance guarantee in regard to the machinery supplied by it.
The said contract contained a clause for retention of I0% of the contract
price by the cooperative society in the following terms:

F "15.2.4 5% of the contract price shall be payable after satisfactory
commissioning and working of the plant for three months that is
three months from the achievement of the performance guarantee as
stipulated in clause no. 8 and 9 above, by a separate letter of credit.

15.2.5 5% of the contract price shall be paid after six months after
G satisfactory commissioning of the plant and continuous successful
working of the plant during the period i.e. six months working of the
plant as per clause 8 and 9 above, by a separate letter of credit."·

Pentagon, however, by a letter dated 6th April, 1985 suggested for a
modification as regards the said payment clause regulating the cooperative
H
ST ATE BANK OF INDIA v. MULA SAHAKARI SAKHAR KARKHANA LTD. [SJNHA,J.] J 23

society to waive its rights to retain the said I0% of the contract price, and A
in its tum proposed to have a letter of credit so that they can furnish appropriate
bank guarantee; to which the cooperative society accepted stating:

"You have also to submit the performance guarantee at I0% of the
contract price, if the same guarantee is not received the karkhana is
entitled to recover it from the balance payment and accordingly we B
have deducted it for want of performance guarantee."

Pentagon in response thereto.by its letter dated 16th April, 1985 agreed
to the said proposal stating:

" ... As per agreement you have to open separate L/C for l 0% retention C
which is still not done by you. As soon as you open L/C, we will give
you Bank Guarantee for the retention money within I0 to 15 days
thereafter ... "

The Bank Guarantee/Indemnity was thereafter furnished by the Appellant
herein on or about 7th September, 1985; the relevant clauses whereof read as D
under:

"Please find enclosed herewith the bank guarantee bearing No. 85/17
dated 4th September, 1985 issued by State Bank of India, Dombivli
Industrial Estate Branch, Dombivli.
E
The guarantee is issued in pursuance of our agreement for paper
project dated 25.9.1983. The guarantee covers 10% retention amount
of Rs. 34 lacs.

An amount of Rs. 13, 76,285/- is retained from the Proforma
Invoices of the material reached at site. F
Kindly release the amount of Rs. 13,76,285/- to be retained by
you immediately on receipt of this guarantee and oblige."

THE DISPUTE

Disputes and differences arose by and between the cooperative society
G
and Pentagon. The contract of Pentagon was terminated by the cooperative
society by a notice dated 17th July, 1987. A claim of Rs.3,23,28,209.10 was
also raised. Pentagon not only denied and disputed its liability to pay the said
sum but also, on the other hand, asserted that an amount of Rs.4,66,73,300/
- was due and owing to it by a letter dated 18th July, 1987. H
324 SUPREME COURT REPORTS [2006) SUPP. 3 S.C.R.

A The Bank Guarantee was thereafter invoked by the cooperative society.
The demand of the cooperative society invoking the said Bank Guarantee
met resistance from the Appellant stating that it had executed an agreement
of indemnity pursuant whereto or in terms whereof only losses, claims,
damages, actions and costs which might have been suffered by it, were covered
B and the transaction in question does not constitute Bank Guarantee. It was,
therefore, contended that unless the cooperative society proved any loss or
damage for design, performance, workmanship or supply of any defective
material through a competent court or authority, the Appellants were not
liable to pay the said amount.

C PROCEEDINGS
Cooperative society thereafter filed a suit in the Court of Civil Judge,
Senior Division, Ahmednagar which was numbered as Special Civil Suit No.
310 of 1987. An application was filed by the cooperative society in the said
suit for a direction upon the Appellant to deposit the amount of Rs.34,00,000/
D-

ORDER OF THE COURT

The matter relating to passing of an interim order went upto the High
Court. The High Court by an order dated 23rd February, 1988 directed that
E the said amount be retained by the Appellant subject to the condition that in
the event, the suit is decreed the said amount would be paid with interest @
12% per annum. The suit was dismissed. An appeal was preferred thereagainst
by the cooperative society before the High Court. The High Court construing
the said agreement dated 25.9.1983 to be a Bank Guarantee decreed the suit
F directing Appellant to pay the said sum of Rs.34,00,000/- with interest @
14% per annum.

The Appellant is, thus, before us.

SUBMISSIONS
G Mr. G.E. Vahanvati, learned Solicitor General appearing on behalf of
the Appellants submitted that:

(i) On a true construction of the document dated 4th September,
1985, it would be seen that the same is a contract of indemnity
and not a Bank Guarantee.
H
STATE BANK OF INDIA v. MULA SAHAKARI SAKHAR KARKHANA LTD. [SINHA, J.] J 25

(ii) The High Court committed a manifest error in considering the A
oral evidence adduced by the parties in construing the said
document dated 4th September, 1985.
(iii) Interest awarded@ 14% per annum is contrary to and inconsistent
with the directions of the High Court as contained in its order
dated 23rd February, 1988. B
Mr. Naphade, learned Senior Counsel appearing on behalf of the
cooperative society, on the other hand, submitted that:

(i) the substance of the matter must be considered in the backdrop
of events in which the Bank Guarantee was furnished by the C
Appellant and for that purpose surrounding circumstances were
relevant. As the terms of contract need not necessarily be gathered
from one document, the relevant circumstances could also be
considered, they being:-
(a) The document in question is by way of a letter. It refers to D
the original agreement dated 29.5.1983 in terms whereof the
cooperative society agreed to purchase from Pentagon the
paper plant on turnkey basis. The said agreement stipulates
that final payment should be made to the supplier on his
furnishing a Bank Guarantee to the cooperative society for
design, performance, workmanship or against defective E
materials or equipment supplied.

(b) Pantagon was a client of the Appellant and it had approached
it for furnishing the Bank Guarantee.

Strong reliance in this behalf has been placed on S. Chattanatha F
Karayalar v. The Central Bank of India and Ors., [ 1965] 3 SCR 318 and P.L.
Bapuswami v. N. Pa/lay Gounder, (1966] 2 SCR 918.

BANK GUARANTEE

The Operative portion of the Bank Guarantee dated 7th September, G
1985 reads, thus:

"NOW THEREFORE THIS BANK GUARANTEE is made in favour
of Mula Sahakari Sakhar Karkhana Ltd. by State Bank of India
(Dombivli Industrial Estate Branch) agreed security the State Bank of
India (Dombivli Industrial Estate Branch) hereby agrees and undertake H
326 SUPREME COURT REPORTS (2006] SUPP. 3 S.C.R.

A subject to the terms and conditions set forth in this agreement to
indemnify and keep indemnified Mula Sakhari Sakhar Karkhana Ltd.
against all losses, claims, damages actions and cost in respect of such
sums which the supplier shall become liable to pay as the terms of the
said order."

B In addition to the aforementioned, the Appellant agreed to the other
tenns and conditions referred to therein, stating :

"NOTWITHSTANDING anything hereinbefore contained, our
maximum liability under this guarantee is restricted to Rs. 34,00,000
(Rupees Thirty four Lacs only). This guarantee shall remain in force
c upto 3rd September 1987 unless a suit or action to enforce claim
under this guarantee is filed against us on or before the 3rd September,
1987 all right under this guarantee shall be forfeited and we shall be
relieved and discharged from all liabilities hereunder."

D The High Court, however, despite noticing the said document in extenso,
committed a manifest error in opining:

" ... The recital in the preamble in question itself cannot be the
foundation to interpret the document in question as a document of
indemnity ... "
E Although it was opined that the same was intended to be a contract of
indemnity, the High Court wrongly observed:

" ... There was no obje1:tion of any kind referred to or placed on t~e
record by the appellants. The Officer of the Bank stated before the
Court that the document in question was intended to be a contract of
F guarantee and not a contract of indemnity. The written document
(Exhibit-46) as quoted above lays emphasis on the preamble as
under._"

Yet again, in the said paragraph, the operative portion of the document
G was erroneously described as a preamble stating:
" ... The preamble of the document in question creates an impression
that the said document is a contract of indemnity and not a contract
of guarantee ... "

The High Court, furthermore, inserted some words in the said document
H
ST ATE BANK OF INDIA v. .MULA SAHA KARI SAKHAR KARKHANA LTD. [SINHA,).] J 27

which in fact were not there, as for example, in paragraph 31 of the impugned A
judgment it added the term "unequivocal condition" which term did not find
place in the document in question. Similarly, in paragraph 34, it was.stated:

" ... The appellants are entitled to their claimed money without any
delay or demur. The nature and need of such commercial contracts
and documents need to be respected by the parties concerned ... " B
Yet again, it was stated:

"If the terms and conditions of the Bank Guarantee are unconditional
and absolute, the respondents have no choice but to honour the
same .... " c
(Emphasis added)

No such terms were used in the said document. The approach of the
High Court on construction of the said document was, thus, patently wrong.
D
The High Cou11 committed a manifest error in terming the operative
portion of the document as a preamble. It had inserted terms and expressions
which did not find place in the document in question.

The High Court furthermore considered the oral evidence adduced by
the parties despite the bar contained in Sections 91 and 92 of the Indian E
Evidence Act holding:

(i) " ... The testimony of these witnesses, in no way, derogates the
document in question. On the contrary, the evidence supports the
purpose and object of the execution of the Bank Guarantee in
question. It also supports that the parties, specially the appellants F
are the creditors-beneficiaries, the respondents - Bank are the
guarantors - the surety and the supplier is Mis Pentagon - the
principal debtor. As we have noted and as contemplated under
Section 124 of the Contract Act, such Bank Guarantee should
have three ingredients, i.e., creditor, guarantor and principal G
debtor. On a bare reading of this document, it is nothing but a
tripartite agreement between the parties. Mis. Pentagon submitted
the said Bank Guarantee by its letter dated 7th September, 1985
to the appellants. The appellants, as noted above, without any
demur or objection, accepted this document as a Bank Guarantee H
and based upon the same, the amount was released. There is i1u
328 SUPREME COURT REPORTS [2006) SUPP. 3 S.C.R.

A evidence to support that in absence of this bank guarantee, the
amount would not have been released by the appellants."

B
(ii) "Therefore, according to us, the express terms of the written
agreement in question, supported by the testimony of the
respondents Bank's Officer itself, apart from the appellants, some
statements in the cross-examination or raising doubts about the
-
nature of the agreement by one of the Bank witness, that itself
would not affect the written agreement in question .... "
(iii) " ... In this background, we cannot overlook the circumstances
under which the particular words were used and/or misused ... "
c A document, as is well known, must primarily be construed on the
basis of the terms and conditions contained therein. It is also trite that while
construing a document the court shall not supply any words which the author
thereof did not use.

D The document in question is a commercial document. It does not on its
face contain any ambiguity. The High Court itself said that ex facie the
document appears to be a contract of indemnity. Surrounding circumstances
are n~levant for construction of a document only if any ambiguity exists
therein and not otherwise.

E The said document, in our opinion, constitutes a document of indemnity
and not a document of guarantee as is clear from the fact that by reason
thereof the Appellant was to indemnify the cooperative society against all
losses, claims, damages, actions and costs which may be suffered by it. The
document does not contain the usual words found in a bank guarantee furnished
p by a Bank as, for example, "unequivocal condition", "the cooperative society
would be entitled to claim the damages without any delay or demur" or the
guarantee was "unconditional and absolute" as was held by the High Court.

The High Court, thus, misread and misinterpreted the document as on
scrutiny thereof, it had opined that it was a contract of guarantee and not a
G contract of indemnity.
The document was executed by the Bank in favour of the cooperative
society. The said document indisputably was executed at the instance of
Pentagon.

H We have hereinbefore noticed the surrounding circumstances as pointed
STATE BANK OF INDIA v. MULA SAHAKARI SAKHAR KARKHANA LTD. [SINHA,.1.] 329

out by Mr. Naphade as contained in Clauses 15.2.4 and 15.2.5 of the contract A
vis-a-vis the letters exchanged between the parties dated 6.4.1985, 11.4.1985,
16.4.1985 leading to execution of the document dated 07.09.1985 by the
First Appellant in favour of the cooperative society.

We are, however, unable to accept the submissions of the learned Senior
Counsel that the bank guarantee must be construed in the light of other B
purported contemporaneous documents. A contract indisputably may be
contained in more than one document. Such a document, however, must be
a subject matter of contract by and between the parties. The correspondences
referred to hereinbefore were between the cooperative society and Pentagon.
The said correspondences were not exchanged between the parties hereto as C
a part of the same transaction. The Appellant understood that it would stand
as a surety and not as a guarantor.
.J

The decision of this Court in S. Chattanatha Karayalar (supra) on
which reliance was placed by Mr. Naphade is not applicable to the fact of the
present case. Therein, the construction of a promissory note executed in D
favour of a Bank was in question. The said promissory note was construed
in the context of the letters and the hypothecation agreement executed by the
borrower on the basis whereof it was held that the status of the Appellant
iherein with regard to the overdraft amount was that of a surety and not that
of a co-applicant. In the said decision itself, Ramaswami, J. opined:
E
" ... The provisions of Section 92 of the Evidence Act do not apply in
the present case, because Defendant 3 is not attempting to furnish
evidence of any oral agreement in derogation of the promissory note
but relying on the existence of a collateral agreement in writing -
Exs. A & G which form parts of the same transaction as the promissory
note Ex. - B"
F

The High Court proceeded on the basis that Section 92 of the Evidence
Act would be attracted in the instant case but despite the same it referred to
the oral evidence so as to find out the purported circumstances surrounding
the transaction, which in our view, was not correct. G
In P.L. Bapuswami (supra), relied upon by Mr. Naphade, this Court
was concerned with a question as to whether Ex. B-1 therein was a transaction
of mortgage by conditional sale or a sale with a condition of re-transfer in
the light of Section 58(c) of the Transfer of Property Act. We are not concerned
with such a case here. H
330 SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A it is one thing to say that the nature of a transaction would be judged
by the terms and conditions together with the surrounding and/or attending
circumstances in a case where the document suffers from some ambiguities
but it is another thing to say that the court will take recourse to such a course,
although no such ambiguity exists.

B [See Bishwanath Prasad Singh v. Rajendra Prasad and Anr., (2006) 2
SCALE 699]

It is beyond any cavil that a bank guarantee must be construed on its
own terms. it is considered to be a separate transaction.

C If a construction, as was suggested by Mr. Naphade, is to be accepted,
it would also be open to a banker to put forward a case that absolute and
unequivocal bank guarantiee should be read as a conditional one having regard
to circumstances attending thereto. it is, to our mind, impermissible in law.

D In New India Assurance Company ltd. v. Kusumanchi Kameshwara
Rao and Anr., (1997] 9 SCC 179, it is stated:

" ... It is obvious that when such guarantee bonds are reduced to writing
the express terms of this writing containing the guarantee bond would
be the repository of the obligations of the guarantor flowing from the
surety bond. As per Sections 91 and 92 of the Indian Evidence Act,
E 1872 no evidence dehors the terms of the agreement, whether
documentary or oral, can be led by the parties to get out of the
express terms th1ereof. Whether the express terms of the guarantee
bond give rise to the contract of guarantee sought to be enforced will
be the only limited enquiry which could be gone into by the courts
F while deciding the rights and obligations flowing from such contract
of guarantee which is a tripartite contract between the creditor,
principal debtor and the surety. Once such suretyship agreement is
established on the clear terms of the bond then as laid down by the
aforesaid decisions of this Court no latitude can be given to the
contracting party, namely, the surety or even the principal debtor to
G enable them to get out of the obligations of the suretyship agreement
flowing from such contract, except in exceptional circumstances as
indicated in these decisions .... "

In Hindustan Construction Co. Ltd. v. State of Bihar and Ors., [1999]
H s sec 436, the guarantee in question was in the following terms:
STATE BANK OF INDIA v. MULA SAHA KARI SAKHAR KARKHANA LTD. [SINHA,J.] 33 J

" ... We, State Bank of India, incorporated under the State Bank of A
India Act, 1955, and having one of our branches at Nyayamurti C.N.
Vaidya Marg, Fort, Bombay-400 023 (hereinafter referred to as 'the
said Bank'), as instructed by the contractor, agree unconditionally
and irrevocably to guarantee as primary obligator and not as surety
merely, the payment of the Executive Engineer, Kharkai Dam Division B
11, !cha, Chaliama, Post Kesargarhia, District Singhbhum, Bihar, on
his first demand without whatsoever right of objection on our part
and without his first claim to the contractor, in the amount not
exceeding Rs. I 0,00,000 (Rupees ten lakhs only) in the event that the
obligations expressed in the said clause of the above-mentioned
contract have not been fulfilled by the contractor giving the right of C
claim to the employer for recovery of the whole or part of the advance
mobilisation loan from the contractor under the contract... ... "

Despite such conditions, holding that the guarantee in question was a
performance guarantee, this Court opined:
D
"The Bank, in the above guarantee, no doubt, has used the
expression "agree unconditionally and irrevocably" to guarantee
payment to the Executive Engineer on his. first demand without any
right of objection, but these expressions are immediately qualified by
following:
E
" ... in the event that the obligations expressed in the said clause
of the above-mentioned contract have not been fulfilled by the
contractor giving the right of claim to the employer for recovery
of the whole or part of the advance mobilisation loan from the
contractor under the contract."
F
This condition clearly refers to the original contract between HCCL
and the defendants and postulates that ifthe obligations, expressed in
the contract, are not fulfilled by HCCL giving to the defendants the
right to claim recovery of the whole or part of the "advance
mobilisation loan", then the Bank would pay the amount due under
the guarantee to the Executive Engineer. By referring specifically to G
clause 9, the Bank has qualified its liability to pay the amount covered
.....
by the guarantee relating to "advance mobilisation loan" to the
Executive Engineer only if the obligations under the contract were
not fulfilled by HCCL or HCCL has misappropriated any portion of
the "advance mobilisation loan". It is in these circumstances that the H
332 SUPREME COURT REPORTS (2006] SUPP. 3 S.C.R.

A aforesaid clause would operate and the whole of the amount covered
by the "mobilisation advance" would become payable on demand.
The bank guarantee thus could be invoked only in the circumstances
referred to in clause 9 whereunder the amount would become payable
only if the obligations are not fulfilled or there is misappropriation.
That being so, the bank guarantee could not be said to be unconditional
B or unequivocal in terms so that the defendants could be said to have
had an unfettered right to invoke that guarantee and demand immediate
payment thereof from the Bank."

It was clearly held therein that the bank guarantee constitutes a separate,
C distinct and independent contract between the bank and the defendants.
In this case, the document in question does not specifically refer to any
particular clause of the 1~ontract. In fact the contract does not contain any
clause requiring Pentagon to furnish any Bank Guarantee.

D We may now consider the decision in Daewoo Motors India Ltd. v.
Union of India and Ors., [2003] 4 SCC 690. The bank guarantee involved
therein inter alia read as under:

"We, Times Bank Ltd., PTI Building, Parliament Street, New Delhi,
110 00 t further agree that the demand made by the President of India
E any money so demanded notwithstanding any dispute raised by Mis
Daewoo Motors India Ltd. in any proceeding before any court or
tribunal;

We, Times Bank Ltd., PTI Building, Parliament Street, New Delhi
110 00 I further agree that the demand made by the President of India
F shall be conclusive as regards the amount due and payable by us
under these presents as out of liability under these presents are absolute
and unequivocal;"

Construing the terms thereof, this Court held:

"From a perusal of the above clauses, it is abundantly clear that
G
the bank guarantee furnished by the Bank is an unconditional and
absolute bank guarantee. The Bank has rendered itself liable to pay
the cash on demand by the President of India "notwithstanding any
dispute raised by M/s Daewoo Motors India Limited in any proceeding
before any court or tribunal". It is worth noticing that the clause in
H the bank guarantee specifically provides that the demand made by the
STATE BANK OF INDIA v. MULA SAHAKARI SAKHAR KARKHANA LTD. [SINHA,J.] 333

President of India shall be conclusive as regards the amount due and A
payable by the Bank under this guarantee and the liability under the
guarantee is absolute and unequivocal. In the face of the clear
averments, it is trite to contend that the bank guarantee is a conditional
bank guarantee. Therefore, the Bank has no case to resist the
encashment of the bank guarantee. Inasmuch as we have held that the B
bank guarantee is an unconditional bank guarantee, the case of
Hindustan Construction Co. ltd. v. State of Bihar, is of no avail to
the appellant."

The said decision, in the facts and circumstances of the case, cannot be
said to have any application here.
c
We are not oblivious of the decisions of this Court where, save and
except the cases of fraud or irretrievable evil, the Bank has been held liable
to pay the guaranteed amount without any demur whatsoever. In an instructive
judgment, M. Jagannadha Rao, J. in Federal Bank Ltd. v. VM Jog Engineering
ltd. and Ors., [200 I] I SCC 663 referring to Uniform Commercial Practice D
of Documentary Credits and a catena of decisions of this Court as also the
English Courts, dealt with a case where a fraud was alleged and observed:

"Thus, not only must "fraud" be clearly proved but so far as the bank
is concerned, it must prove that it had knowledge of the fraud. In
United Trading Corpn. S.A. v. Allied Arab Bank it was stated that E
there must be proof of knowledge of fraud on the part of the bank at
any time before payment. It was also observed that it

"would be sufficient ifthe corroborated evidence of the plaintiff usually
in the fonn of contemporary documents and the unexplained failure
of a beneficiary to respond to the attack, lead to the conclusion that F
the only realistic inference to draw was 'fraud'."

[See also Dwarikesh Sugar Industries Ltd. v, Prem Heavy Engineering Works
(P) ltd. and Anr., [1997] 6 SCC 450 and Mis. BSES Ltd. (Now Reliance
Energy ltd.) v. Mis. Fenner India ltd. & Anr., JT (2006) 2 SC 192]
G
However, in this case, we have no doubt in our mind that the document
in question constitutes a contract of indemnity and not an absolute or
unconditional bank guarantee. The High Court, therefore, erred in construing
the same to be an unconditional and absolute bank guarantee.

H
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334 SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.

A RATE OF INTEREST
Contention of Mr. Vahanvati as regards the rate of interest is also
incontrovertible. The order dated 23rd February, 1988 clearly states that the
amount would be repaid with an interest @ 12% and in that view of the
matter, the High Court could not have directed payment of interest@ 14%.
B
For the reasons aforementioned, the impugned judgment cannot be
sustained which is set aside accordingly. The decree of the trial court is
restored. The appeal is allowed with costs. Counsel's fee assessed at Rs.
5000/-.

C B.B.B. Appeal allowed.

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